‘We intend to achieve the 2 per cent inflation target and maintain that in a stable manner.’
Haruhiko Kuroda, Bank of Japan
‘We will now work with our suppliers, key stakeholders and the government to determine our next steps and whether we can continue operating as the sole vehicle manufacturer in Australia.’
Toyota spokesman, yesterday
About the only thing that can save car manufacturing in Australia now is an Aussie dollar crash. And even that may not be enough. The dollar is doing its best (see chart below). It traded below 90 cents this morning. Glenn Stevens from the Reserve Bank of Australia unleashed another verbal broadside against the local currency.
Here’s an important point about where we are in economic history: the middle class of the developed world now sees that globalisation is inherently deflationary for wages. And with monetary policy designed to benefit the owners of capital and financial assets, the middle class is getting squeezed good and hard.
The decline of manufacturing in Australia is a prime example. First Ford, then Holden, and probably next Toyota. But what can you expect when several billion people are added to the global workforce? Cheap jobs are part of globalisation just as much as cheap goods are.
For most of the last two decades, we’ve enjoyed the benefits of globalisation in the form of lower prices for consumer goods. That cost jobs in the textile and electronics industries. But most consumers were happy with lower prices. Who cares if your trainers are made by kids in Asia? At least they’re cheap!
Now people are starting to wonder if there are any high-paying jobs that are truly safe from the forces unleashed by globalisation. And it’s not just globalisation. It’s technology. The more machines replace people, the harder it is for people to find work that pays just as well (or work that is as meaningful). Technology is deflationary too, to the extent that labour-saving machines lower prices.
My point is that the job losses at Holden this week aren’t just an Australian story. It’s part of a global trend. Countries in the industrialised and developed world enjoyed a huge advantage in manufacturing for the last 100 years. They’re losing it now, and in some cases, like here in Australia, there’s nothing to replace it with.
In the meantime, the affluent developed world has also built a generous cradle-to-grave Welfare State on top of its old economic model. Now it’s a simple math problem. There’s not enough money to pay for the promises that have been made. The middle class gets bashed on two fronts. Real wages decline even as entitlement spending increases, driven by demographics. This whole scenario is why I’m convinced that economic problems will eventually become political and social problems.
Societies become unstable with too much income inequality. It’s not that people are too rich. It’s that the financial system has been hijacked by the interests of the financial class. They manipulate markets to profit from the gain in asset values made possible by interest rate manipulation and currency devaluation. Then, they scoop up productive assets after a crash. People on wages are out of luck.
It’s not capitalism at fault here. It’s the banking and finance industries gaining control of the agencies that regulate them and then writing rules to favour their interests. More people will start to see it that way when stocks stop going up. And when they do see it, it won’t be pretty. It will be violent.
The Battle for Altona is going to be lost. Toyota will likely pack up and leave, too. No amount of government money is going to make the Australian car industry competitive in a globalised world. The battle for the rest of Australia — what industries can survive and prosper for the next 100 years — that’s raging as well.
Greenback strength but QE failure
Let’s get back to the markets for a moment. The US dollar rallied overnight. One reason why is that the US House of Representatives passed a budget by a vote of 332-94. It’s a two-year budget deal. It now goes to the Senate, which is expected to pass it.
On the surface, this would seem to take some of the uncertainty out of the US fiscal picture. The deal isn’t done and dusted yet, but it’s a deal with bi-partisan support. That fact was enough to cheer markets.
Then there’s the ‘taper’ issue. With some benign US macro data out this week, plus the budget agreement, the consensus view is that the Fed is now more likely to ease up on its bond purchases. That might be bad for stocks (the S&P 500 has been down four days in a row). But it clearly makes the dollar look better because it means US interest rates may rise. But check out the chart below.
The dirty little secret of Quantitative Easing is that every time the Fed says it will do more, interest rates rise! You can see above that 10-year US bond yields (on which the 30-year fixed mortgage rates are based) have been rising since the middle of July. In other words, Fed bond purchases aren’t keeping interest rates down at all. The Fed is really only keeping stock prices up.
And consider this number: $85 billion. Everyone knows that’s what the Fed spends, combined, on Treasury bonds and mortgage backed securities as part of its QE program. But $85 billion is also the amount of money that will be shaved off the US deficit, according to proponents of the budget passed yesterday…over ten years.
That’s right. The budget deal that passed with bi-partisan support locks in $1 trillion in spending over each of the next two years. And its grand ambition is to reduce the $17 trillion US deficit by exactly $85 billion over the next ten years. What a complete bi-partisan joke!
The chart above from the US Congressional Budget Office (CBO) shows you just how serious American politicians are about cutting spending and forcing the government to live within its means. They have no intention of reducing spending in order to reduce the deficit as a percentage of GDP.
This is an American chart. But it’s a cautionary tale for Australia, too. Once you get into the habit of spending more than you earn, it’s a hard habit to break. Politicians will carry on with it until they destroy the currency by printing money to pay off debts. That’s where this is headed, eventually.
Ironically, though, the greenback may be the big winner in 2014. This is Vern Gowdie’s prediction. Vern reckons that the US will rout emerging markets next year, as money flows from the edges of the global economy back to the US core. He reckons this will be accompanied by a rather large correction in stock prices. Stay tuned for more on that next week.
Self-termination of the bears
How anyone could look at the chart above and NOT see that we’re headed for a wealth-destroying global share market crash is beyond me. But right now, the 25% rise in the S&P 500 this year is claiming more scalps. Eric Sprott will no longer be making investment decisions at the company he founded and that bears his name, according to the Wall Street Journal. Gold’s first down year in the last 12 has cost him.
And then there’s Hugh Hendry. The manager of the Eclectica hedge fund and a noted bear has thrown in the towel. He said late last month that ‘I can no longer say I’m bearish….When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out.’
That’s an extended way of saying there aren’t any investors in the market anymore. It’s all speculation and no valuation. And if a man knows his limitations and is a value investor, he’ll stop arguing about what things should be worth and get out of the way of the raging bull.
These capitulations usually mark extremes in the market. When high profile bears go public and eat ashes and wear sack cloth and plead forgiveness for being wrong, you’d think the end of the bull is nigh.
Dan Denning+
Contributing Editor, Money Morning
Ed Note: The above article is an extract from an update originally published in The Denning Report.
